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Am I crazy to consider paying advisor fees?
Old 04-27-2010, 07:58 PM   #1
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Am I crazy to consider paying advisor fees?

I suspect I know the response I am going to get, but need some advice. I just met with a Financial Advisor at Chase who would charge fees to advise and actively manage my portfolio with the following rates:
first $250k 1.6% fee
next $250k 1.35% fee
next $500k 1.1% fee
over $1M .85% fee

By paying these rates I pay no additional fees to purchase any individual investments and they are not incented to sell me any particular funds or make me want to trade often just to make commissions.

I am about to sell a second house which will bring in $575k lump sum cash. Plus I have other investments currently with Fidelity at around $425. So, we are talking about $1M to manage for now. Probably add another $1M over the next few years.

Per advise from this site, I am starting to read some books - Asset Allocation and Boglehead. Part of me says I should just do what the book says and diversify, purchasing no load funds (such as Vanguard) where I can and rebalance myself every 6 months. But part of me says that I really do not know what I am doing and I should pay the fee for a little while and learn. According to the financial advisor, of course, the fee would pay for itself since my portfolio would earn more than the 1+% fee.

OK ... let me have it ...
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Old 04-27-2010, 08:07 PM   #2
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It is up to you, but there is another thread going on about the real rate of return of market investments, and the consensus averages at about 4.5%. Do you really want to be paying 1.2%, about 30% of your real growth, to an adviser ($12,000+/year)?

$1M under that pay structure is actually the sweet spot for the adviser, he is probably making $1000+/hr in that range.

That does not even get into any other fees that somehow may get involved (he is not even your fiduciary). What about back-end fees?

Have you read this article about how rarely active investment advisers outperform indexing in the long term (or even short term)? What are you paying for if you already know how to index?

http://www.forbes.com/2010/04/22/mut...xer-ferri.html
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Old 04-27-2010, 08:20 PM   #3
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plex noted the fees. $12K+ for first million. Unless the advisor is going to work some magic moving you into and out of hot sectors, etc. (which most here don't buy into - myself included), at best he/she will put you into some agreed upon asset allocation and leave you there except for some rebalancing along the way. You can do that yourself with a little reading. If you don't yet trust yourself, why not go to a fee-only adviser, who for an hourly or package consulting fee (more like $2K one time for a plan, rather than $12K + annually) can put you in the same place and give you the comfort of professional advice. You could even get an annual "tune-up" from a fee-only consultant and still be way ahead of the game. I'd suggest you read first and pick any of the several basic portfolios suggested by the authors frequently discussed here and on bogleheads.org and do-it-yourself.
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Old 04-27-2010, 08:44 PM   #4
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There are much less expensive advisors out there. They do not live in banks.
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Old 04-27-2010, 08:53 PM   #5
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Seems expensive. If all they do is recommend mutual funds, forget it. You're already paying the mutual funds a fee. If they're going to buy stocks for you and actively manage them, including foreign stocks, then they look a little more reasonable. But then you have no public track record to compare with other advisors to see if these guys are worth it.

Go with mutual funds. If you don't want to work at it too much, try a one-time consultation with an advisor to set up your portfolio, tell you how to rebalance it, and what to watch for in the future.
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Old 04-27-2010, 09:01 PM   #6
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For the kind of money you are talking about Vanguard will do a complete financial plan for you with an individually assigned adviser, and help you implement the plan (average in over a period of time). You can also get complementary annual "tune-ups".
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Old 04-27-2010, 09:11 PM   #7
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For the kind of money you are talking about Vanguard will do a complete financial plan for you with an individually assigned adviser, and help you implement the plan (average in over a period of time). You can also get complementary annual "tune-ups".

Earl, pay attention, this is exactly what you should be doing. Anything other than this is a mistake IMHO. If you live off 4% of 1M yet give 1% of that # to the so called advisor, you then have a 25% partner and he/she has no investment to lose.
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Old 04-27-2010, 09:20 PM   #8
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Originally Posted by Earl E Retyre View Post
According to the financial advisor, of course, the fee would pay for itself since my portfolio would earn more than the 1+% fee.
Above is comical.

There's three categories of options:
1. Do It Yourself, or
2. Pay a fee based independent planner or Vanguard to set up overall asset allocation, or
3. Get hosed at Chase

Starting with #2 above for a couple years and then doing it yourself after you're comfortable/confident seems like would be a balanced way to go for you.

If you do #3, two years later you'll have spent $25k and be no more educated than you are now.

Good luck !
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Old 04-27-2010, 09:35 PM   #9
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My post wasn't clear. Unless I am mistaken, for the amount of deposits you are considering, Vanguard will assign an adviser and do a complementary financial plan for you. It is part of their Flagship service.
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Old 04-28-2010, 01:39 AM   #10
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Let me give you two quotes from a recent thread asking a similar question:
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Originally Posted by WanderALot View Post
One thing I've noticed when discussing investment costs with others is that they think it's "just 1% or 2%" for "professional management". As others here have said, that is just a huge amount of money. If you are going to retire on 4% of your portfolio, you are going to be paying at least 25% of your income, every single year, to this guy.
(emphasis added)

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Originally Posted by Bestwifeever View Post
Write a check for 1 percent of your assets and show it to your wife. Ask her if she wants it made out to her or to Ameriprise. Remind her the payment will be repeated every single year. I bet she will come around.
I can't say it any better than Bestwifeever and WanderAlot already have!
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Old 04-28-2010, 01:57 AM   #11
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Originally Posted by Earl E Retyre View Post
According to the financial advisor, of course, the fee would pay for itself since my portfolio would earn more than the 1+% fee.
OK ... let me have it ...
Be sure to ask him for his money-back policy on this one...
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Old 04-28-2010, 08:17 AM   #12
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These guys make their money marketing fear. Put the money in a money market fund for now, educate yourself by reading some of these key books Investment Books, then act. No one cares about your money as much as you.
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Old 04-28-2010, 08:27 AM   #13
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If you need professional help, I'd recommend using a fee-only planner who has no conflicts of interest in terms of which products he/she recommends to you. I'm not as knee-jerk against the idea as many of the folks here are, but I'd still stay away from the high-priced advisors who have a vested interest in "selling" you on particular products that line their pockets.
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Old 04-28-2010, 08:33 AM   #14
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I think the Internet has about done in the traditional financial advisor function--back in the olden days I don't think an individual really had a lot of options for investment that didn't involve paying someone to take care of them other than just having savings accounts. Maybe you had "your" broker, for example, who was a real person who handled trades for you, so you had to pay him. You could get information about investment prospects by writing to a company and getting reams of paper and wading through them and writing out the pros and cons, and who knew how to do that anyway? So you maybe used a financial advisor and you probably trusted him to have your best interests and just blindly did what he suggested.

But today? You are going to have to sign off on all the investment decisions anyway, so you're going to have to learn all about them anyway, so why pay someone else to do that when it is sooooooo easy to find out about companies, funds, etc., on your own.
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Old 04-28-2010, 08:53 AM   #15
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....
3. Get hosed at Chase
....
Ah, yes, kind-hearted Chase, didn't we bail them out? When they took over my bank (WaMu), they discontinued the free-checking plan. Now if my balance falls below $1,500 they will charge an unspecified amount, I guess I could look it up. I transferred $1,500 from savings to checking to avoid a charge while I figure out what to do about my three checking accounts. Interests rates are so low on savings, I didn't really care except for the bother of reading the fine-print and doing the transfer.
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Old 04-28-2010, 09:00 AM   #16
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Originally Posted by Earl E Retyre View Post
According to the financial advisor, of course, the fee would pay for itself since my portfolio would earn more than the 1+% fee.
One more thing...

Get that in writing and with appropriate guarantees and I'd say go for it.

But good luck with that.
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Old 04-28-2010, 09:32 AM   #17
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Quote:
Originally Posted by Earl E Retyre View Post
I suspect I know the response I am going to get, but need some advice.

...
Per advise from this site, I am starting to read some books - Asset Allocation and Boglehead. Part of me says I should just do what the book says and diversify, purchasing no load funds (such as Vanguard) where I can and rebalance myself every 6 months. But part of me says that I really do not know what I am doing and I should pay the fee for a little while and learn.
...

OK ... let me have it ...
Are you getting what you expected?

Your "Per advise from this site" paragraph is mostly correct, EXCEPT for the idea that you will learn something from a Bank's financial advisor. I encourage you to open the Vanguard account and get started. Continue to read the Boglehead recommended reading list. It is all very easy (once you get over the idea that you can predict the future and pick 'winners').

Once you decide how you want to deal with taxes in your new taxable account, you will know what to do. If it isn't clear, just ASK on the Boglehead forum. You will get good advice.
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Old 04-28-2010, 10:58 AM   #18
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To answer your question, yes.

That doesn't mean you can't get professional help with your help just that paying a percentage each and every year to someone who isn't even a fiduciary is, well, not good.

Here is the link to the services Vanguard provides at different levels:

https://personal.vanguard.com/us/wha...vices/flagship

If you invest $500k or more a financial plan is free. If you don't want to put that much there and you invest $100k, it is $250.

I suggest that this is a much better choice than paying someone an ongoing fee.

The idea that you will earn more than his fee as a justification has two problems.

First, as has been pointed out, it is vanishingly unlikely that he will give you a written money back guarantee of this.

Second, even if he would, it misses the point. Let's say someone is charging you 1% per year and you get investment returns of 7%. Yes, you made more money than he charged.

But imagine you could do it yourself and pay 0% and get investment returns of 7%. You have just paid 1% in the first instance for something of no value to you.

Of course he will say that he can do better for you but the evidence to support that in the long term for any advisor is well not compelling. Read The Four Pillars of Investing by William Bernstein.

Again I do think that getting a financial plan from Vanguard or even paying a one time fee for one may be a good thing.
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Old 04-28-2010, 11:07 AM   #19
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I imagine that Fidelity offers similar services. Any Fido clients out there who can confirm this? Fido also has the advantage of local offices, and I imagine the ability to meet face-to face with a real person would be a big advantage to a newbie investor.
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Old 04-28-2010, 11:10 AM   #20
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In Bernstein's latest book The Investor's Manifesto he is less optimistic that folks can do the investing thing themselves. Not everyone is suited to managing their own money. It may even be that a minority of folks are able to do so.

So what can the rest of the folks who shouldn't manage their own money do? It seems like one should find a fee-only advisor or manager to do the work for them. This will cost them some bucks, so the trick is to find a good one and keep the costs low. It seems that such fee-only advisors exist if you go looking for them and you do not need face time. Expect to pay 0.25% of assets under management or less. Sometimes much, much less.

You need to at least understand that you are not getting any kind of deal if you have to pay more.
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